The treasury market settled into an upward track with economic data in the US deteriorating and infections clearly expected to extend restricted activity through the end of the year. In retrospect, the treasury markets were supported by a favorable price reaction to last week’s 30-year bond auction and some buyers were moving into the markets in anticipation of supportive influences from this week’s Federal Reserve meeting. While a number of developments are serving to deflate flight to quality interest in treasuries early this week, some of those forces have failed to become reality many times in the recent past. Therefore, part of the weakness in bond and note prices is suspect, with fresh hope on both the Brexit and stimulus fronts the most unreliable. On the other hand, a sweep of positive global equity market action, the physical beginning of inoculations, near term hopes of the beginning of inoculations from a 2nd vaccine later this week and some hope that the US Fed might step up with assistance on Wednesday, emboldening the bear camp. Anecdotal bearish news was seen over the weekend with reports of record US Christmas tree sales, Christmas decorations sales exploding and economists expecting electronic sales of gifts to post records.
In retrospect, the dollar failed to rally as would be expected given a series of weaker than expected US scheduled data and more importantly, the inability to rally despite unrelenting record infection counts. A US stimulus package was growing less likely by the day. On the other hand, the Swiss franc and euro have certainly become aggressively overbought on short-term technical measures and last week’s sideways action in the dollar probably allowed those markets to balance. While the US dollar has not forged a new contract low early this week, it would appear as if the charts in the fundamental storyline set the stage for a contract low in the coming sessions.
The stock market clearly turned down last week and we feel that action is justified by growing evidence that the US recovery is losing pace. Adding into the disappointment among investors is the fact that Congress did not do their jobs and provide a stimulus package when it was needed. Certainly, progression toward vaccinations is underpinning prices but the duration between the beginning of vaccinations and real-life benefits could be measured in months. While the markets have recently been led to higher by gains in the NASDAQ/stay-at-home stocks, we do not believe that capacity exists in the near term.
GOLD, SILVER & PLATINUM:
While the platinum market came under early pressure last week, it ultimately respected support at $1,000. However, it is possible the market will need some form of major “risk on” vibe flowing from equities to embrace the possibility of a surge/recovery in non-Chinese platinum demand. So far, the World Platinum Investment Council has not confirmed the rotation from palladium to platinum in various industrial products, but it would appear as if demand for platinum in the manufacture of electronics with glass screens was seen from the surge in home offices. As of last week, platinum ETF holdings were up 13% on the year and that reading deserves to be monitored Platinum positioning in the Commitments of Traders for the week ending December 8th showed Managed Money traders net bought 2,267 contracts and are now net long 16,655 contracts. Non-Commercial & Non-Reportable traders are net long 33,613 contracts after net buying 4,810 contracts.
Extensive volatility is expected to continue in copper with big picture macroeconomic issues at key junctions outside of China and China showing signs of moving to quell aggressive price gains in some industrial commodity prices. However, copper should see support from the risk on start to the trading week, from a slight improvement in hopes for an Brexit deal and from news that wage talks at a BHP mine in Chile failed to get a deal in the first round of negotiations. Furthermore, nickel prices continue to rise sharply, and the start of vaccinations certainly helps to improve non-Chinese copper demand prospects. Chinese demand news has continued to surface in various forms with the latest form a decline in weekly Shanghai copper warehouse stocks at the end of last week. In fact, Shanghai copper warehouse stocks are now at the lowest levels in 6 years.
In retrospect, the corrective action following last week’s spike high has probably improved the bull’s case to start the new trading week. Obviously, a global risk on psychology is providing lift to energy and commodity prices to start the new trading week with most headlines trumpeting the potential for improved energy demand from vaccination optimism. Another bullish catalyst was the reports of a potential terrorist attack on a Saudi tanker as that extends a developing pattern of threats against supply in the region. Other bullish forces are the latest weekly floating storage report which posted a decline of 11%, news that Asian-Pacific floating storage fell 22% (the lowest level since April), an upside breakout in WTI spreads and lastly increased bullish positioning in Brent spreads
It will not take much in the way of a weather isue in South America to spark an increase in buying. January soybeans closed moderately higher on the session Friday and this left the market with a loss of just 2 1/2 cents for the week. Traders see the weather in South America as slightly supportive as Brazil continues to see decent rain, but Argentina looks warm and dry over the near term. Exporters announced a sale of 130,000 tonnes of US meal was sold to Philippines. In the USDA report last week, world meal consumption was pegged at 251.05 million tonnes, up from 240.8 million last year and 230.1 million 2 years ago. Argentine production was revised down and Argentina exports were revised down by 800,000 tonnes.
US corn export sales for 2020/21 have reached 67% of the USDA’s forecast for the marketing year versus a 5-year average of 44% at this point in the season. Like the soybean market, the trade may have been disappointed that the USDA did not revise their 2020/21 export estimate. March corn closed higher on the session Friday and this left the market with a gain of 3 cents on the week. The USDA report was disappointing to the bulls as the USDA failed to change exports in spite of a very fast pace for the season to date. The South America weather is a mixed bag with dryness and Argentina and some more normal rainfall for the key Brazilian growing areas. Unless China cancels US corn imports, the USDA is likely to increase exports and lower ending stocks in the January report. Any sign of poor weather in South America is likely to spark aggressive buying. World ending stocks were revised down to 288.96 million tonnes from 303.4 million last year, 319.8 million two years ago and 340.7 million for the 2017/18 season.
The technical action is positive and March wheat is up as much as 54 3/4 cents from Tuesday’s low. Russia officials last week were considering imposing a wheat export tax of about 2,000 Rubles per tonne (near $27.30) for February 15 through June 30. This is just one of the measures which they may use to stabilize domestic prices and traders see these moves as a way to slow exports onto the world market. On Sunday, Russia’s economy ministry submitted a proposal to the government to impose a wheat export tax of 25 Euros ($30.30) for the February 15-June 30 timeframe, according to Reuters. After the three days surge higher, traders might expect some “buy the rumor, sell the fact” type selling. March wheat closed 18 cents higher on the session Friday, and the buying has pushed the market up to the highest level since November 25. The market continues to find support from concerns that Russia will put a significant tax on exports which will tighten available exportable surplus on the world market.
The technical action is weak and the short-term demand outlook remains questionable while the supply looks more than adequate for the current set-up. However, if exports slow, the market appears poised for further weakness. February hogs closed sharply lower on the session Friday and this pulled the market to a discount to the cash market. The CME Lean Hog Index as of December 9 was 65.61 down from 65.66 the previous session and down from 66.55 the previous week. The market found some early support after strength in the ham market and in pork cutout values last week, and traders are nervous that the ham market will seasonally peaked out soon. If so, and if China imports of US pork also decline into 2021, the market looks vulnerable to a resumption of the downtrend.
February cattle closed sharply higher on the session Friday and the buying pushed the market up to the highest level since December 2. This was the third higher close in a row. Beef prices were sharply lower on the week and cash markets are lower for the second week in a row. The USDA boxed beef cutout was down $1.02 at mid-session Friday and closed 71 cents lower at $213.88. This was down from $235.02 the previous week and was the lowest the cutout had been since November 5. The weak beef prices opens the door for a further break in the cash cattle market this week. Open interest is on the rise and reached the highest level since October 8. The USDA estimated cattle slaughter came in at 118,000 head Friday and 73,000 head for Saturday. This brought the total for last week to 665,000 head, down from 667,000 the previous week and down from 666,000 a year ago. Beef production for the week is up 2% from a year ago.
While cocoa has lifted clear of last Thursday’s 3 1/2 week low, it will deal with near-term demand concerns and will react to the ebb and flow of Brexit negotiations. The longer-term demand outlook should improve by the middle of next year while there are fresh bullish supply developments, however, so cocoa is likely to be fairly well supported on any near-term pullbacks. March cocoa followed through on Thursday’s positive reversal as it built on early strength and finished Friday’s trading session with a sizable gain. For the week, however, March cocoa finished with a loss of 32 points (down 1.2%) which was a second weekly loss in a row.
The coffee market has been able to overcome negative outside markets and near-term demand concerns to climb back towards the upper portion of its November/December consolidation zone. With a stronger demand outlook for next year and a bullish 2021/22 supply outlook, coffee can extend its recovery move up to 3-month highs early this week. March coffee had a bumpy finish to the week, but were able to extend their recovery move by finishing Friday’s trading session with a moderate gain. For the week, March coffee finished with a gain of 4.05 cents (up 3.4%) which was a fifth positive weekly result over the past 6 weeks.
The USDA report showed a surprisingly large drop in US production and ending stocks. On top of that, the weekly export sales report came in stronger than expected. The beginning of vaccinations against Covid-19 also offers hope of a renewal in cotton demand. Friday’s Commitments of Traders report showed managed money traders were net sellers of 1,684 contracts of cotton for the week ending December 8, reducing their net long to 58,776 contracts. Non-commercial & non-reportable traders combines were net sellers of 3,244, reducing their net long to 81,840.
While their crushing has slowed down dramatically as many mills shut down their operations for the season, Brazil’s Center-South sugar production this season was more than 11.5 million tonnes ahead of last season’s pace. Most of that increase will be heading out into the global export marketplace and offset supply issues with several producing nations, and that is likely to keep sugar on the defensive early this week. March sugar followed through on Thursday’s negative reversal as it was under pressure for most of the day before finishing Friday’s trading session with a moderate loss. For the week, March sugar finished with a loss of just 1 tick, but that resulted in a third negative weekly result in a row and a negative weekly reversal from last Thursday’s 2-week high.
Risk Warning: Investments in Equities, Contracts for Difference (CFDs) in any instrument, Futures, Options, Derivatives and Foreign Exchange can fluctuate in value. Investors should therefore be aware that they may not realise the initial amount invested and may incur additional liabilities. These investments may be subject to above average financial risk of loss. Investors should consider their financial circumstances, investment experience and if it is appropriate to invest. If necessary, seek independent financial advice.
ADM Investor Services International Limited, registered in England No. 2547805, is authorised and regulated by the Financial Conduct Authority [FRN 148474] and is a member of the London Stock Exchange. Registered office: 3rd Floor, The Minster Building, 21 Mincing Lane, London EC3R 7AG.
A subsidiary of Archer Daniels Midland Company.
© 2021 ADM Investor Services International Limited.
Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The information and comments contained herein is provided by ADMIS and in no way should be construed to be information provided by ADM. The author of this report did not have a financial interest in any of the contracts discussed in this report at the time the report was prepared. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright ADM Investor Services, Inc.